Teva (TEVA) Q4 Earnings Top, Stock Tanks on Weak 2018 View

Teva Pharmaceutical Industries Limited TEVA reported fourth-quarter 2017 earnings of 93 cents per share, which beat the Zacks Consensus Estimate of 81 cents per share and came ahead of the guided range of 70 cents-80 cents. However, earnings per share declined 32% year over year.

Revenues were $5.46 billion, which marginally beat the consensus estimate of $5.42 billion. However, sales declined 16% year over year (down 12% excluding impact of currency).

Sales were hurt by increased pricing erosion and volume declines in the U.S. Generics unit and rapid erosion in sales of Copaxone – Teva’s blockbuster multiple sclerosis injection – in the Specialty segment.

Segment Discussion

Teva revised its segment structure following the Actavis acquisition. The Generics segment now includes revenues from the OTC business as well as the API business.

Generic Medicines segment revenues were $3.1 billion, down 16% year over year.

Revenues from the U.S. generics business declined 15% to $1.2 billion due to significant competitive and pricing pressure in the generics industry. The ongoing consolidation of customers in the generics industry led to increasing price erosion and decreasing volume. The consolidation in the industry has increased the ability to negotiate lower prices for generic drugs. Accelerated FDA approval of additional generic versions of competing off-patent medicines, increased competition for Concerta authorized generic, and stringent government regulations also hurt sales.

European generic revenues were $1.1 billion, flat year over year. However, sales declined 8% in local currency terms from the year-ago period mainly due to absence of revenues from the generic business of Actavis in the United Kingdom, which was divested in January 2017.

Rest of the world (ROW) generic revenues declined 31% to $864 million in the quarter. On a local currency basis, sales rose 2% mainly due to higher sales in Russia and Israel.

API revenues were flat at $181 million. OTC revenues were down 46% to $217 million (up 9% in local currency terms).

Specialty Medicines revenues were $1.8 billion, down 19% from the year-ago period due to lower sales of its central nervous system (CNS) products and divesture of some non-core assets in the Women’s Health business.

Among Teva’s various therapeutic areas, CNS sales declined 21% to $984 million due to lower sales of Copaxone.

Worldwide revenues of Copaxone declined 19% to $821 million mainly due to lower sales in the United States. Sales declined 25% in the United States to $622 million mainly due to the generic competition, which resulted in higher rebates and lower volumes.

Glatopa, a generic version of Copaxone 20 mg, is being marketed by Momenta MNTA and Sandoz – Novartis’ generic arm – since 2015 while Mylan MYL launched its version of the 20 mg formulation in October 2017. In the same month, in a major blow to Teva, Mylan launched (at-risk) its generic version of the 40 mg thrice-weekly formulation, much earlier than expected. With the entry of the generic version of the 40 mg formulation and the entry of a second generic version of the 20 mg formulation, there has been rapid erosion in sales of Copaxone. Moreover, a second generic version of the 40 mg formulation is expected to be launched in April this year.

Ex-U.S. sales of Copaxone were flat on a local currency basis at $199 million.

Among other products, Azilect sales declined 55% to $40 million as a generic version of the drug was launched in the United States in 2017. ProAir declined 27% to $102 million and QVAR declined 47% to $61 million, both hurt by negative net pricing effects. Combined Treanda and Bendeka revenues rose 5% to $157 million

The Other segment (distribution and other activities) recorded revenues of $550 million, down 4% year over year as the company sold-off some distribution businesses.

Profits Decline

Adjusted gross margin contracted 720 basis points (bps) to 52.2% in the quarter. Research & development expenses declined almost 40% from the year-ago period to $310 million. Selling and marketing (S&M) expenditure declined 28% from the year-ago level to $791 million. Adjusted operating income declined 29% to $1.4 billion in the quarter despite lower costs.

2017 Results

Full-year 2017 sales of $22.4 billion beat the Zacks Consensus Estimate of $22.3 billion and also came ahead of the guided range of $22.2 – $22.3 billion. Sales rose 2% year over year, gaining from the inclusion of Actavis Generics revenues.

Adjusted earnings for 2017 were $4.01 per share, which beat the Zacks Consensus Estimate of $3.84 per share and exceeded the guided range of $3.77–$3.88 per share. Earnings declined 22% year over year.

2018 Outlook Below Expectations

Teva expects revenues in the range of $18.3 – $18.8 billion, which fell short of the current Zacks Consensus Estimate of $19.17 billion. The company expects earnings in the band of $2.25–$2.50 per share in 2018, also short of the current Zacks Consensus Estimate of $2.93 per share.

In 2018, Teva expects Copaxone to generate sales of $1.8 billion globally, significantly lower than $3.8 billion in 2017 as the franchise continues to erode.

U.S. Generics sales are expected to decline roughly 20% from 2017 levels to approximately $4 billion in 2018 hurt by ongoing price erosion and generic Concerta. Also, ProAir franchise is expected to see generic competition during the second half of 2018.

Costs are expected to decline $1.8 billion in 2018.

Our Take

Though Teva beat expectations for both earnings and sales in the fourth quarter, its stock crashed more than 10% on Thursday, as the company issued a weak outlook for 2018, wherein it expects sales and profits to decline further this year.

Teva’s shares have slumped 42.1% in the past year compared with the industry’s decline of 29.3%.

The Israel-based generic drug maker had a tough 2017 as it faced significant challenges in the form of accelerated generic competition for Copaxone, new competition for branded products, pricing erosion in the U.S. generics business, lower-than-expected contribution from generic launches and a massive debt load of more than $32 billion. Mylan’s earlier-than-expected launch of the first generic version of the 40-mg strength of Copaxone was a major setback for Teva.

Teva divested some non-core assets (mainly in the Women’s Health business) to cut its significant debt load. The company also has a new organizational structure in place, is closing plants, cutting down its generics portfolio, eliminating low-value R&D projects, and aims to cut its global workforce by more than 25% over the next two years as part of a restructuring plan it revealed in December. Though the company expects to save almost $3 billion by the end of 2019from these restructuring initiatives, a clear path to growth is not visible.

These efforts might not be enough to revive the company’s fortunes during this challenging period, especially as it faces erosion of its largest product, Copaxone. Other than that, divestures and pricing pressure in the U.S. generic business will continue to hurt the top line in 2018.

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